"I write to discover what I believe." Michael Lopp on Twitter

Bloomberg is report­ing that Wells Fargo Chair­man Richard Kovace­vich prefers the lat­est plan from the US to invest directly in banks through stock pur­chases over the orig­i­nal plan to buy up toxic assets from trou­bled banks. Of course he prefers this plan, it’s the one that works best for him as the CEO of a major bank. How­ever, it’s also the plan that bends the Amer­i­can tax­payer over and has him grab his ankles for the next 5 years or so.

In case you hadn’t heard, Hank Paul­son is now sell­ing us on this plan to par­tially nation­al­ize the banks of the nation as a way to get the econ­omy going again. The prob­lem is, we’re get­ting prac­ti­cally noth­ing out of our $250 bil­lion dol­lar invest­ment. We’re not buy­ing pre­ferred shares, we’re not get­ting a guar­an­teed inter­est rate, we’re not get­ting seats on any of the boards of these banks. We’re just a really big investor, noth­ing spe­cial at all. War­ren Buf­fett got an infi­nitely bet­ter deal when he bought into Gold­man Sachs a few weeks ago because he got pre­ferred shares pay­ing a 10% div­i­dend plus the option to buy more shares at 10% below the strike price of the shares he bought. He got all this with a mere $5 bil­lion dol­lar investment.

The Amer­i­can tax­payer, via our buddy Hank Paul­son, is invest­ing 50 TIMESTHATAMOUNT and yet we’re get­ting a much, much worse deal. We can’t force the banks to use the money to lend, we don’t have the option to buy more shares at a lower price and since we’re not get­ting pre­ferred shares, we get a shitty inter­est rate return. There is noth­ing good about this plan for us and every­thing good for peo­ple like Wells Fargo Chair­man Richard Kovace­vich who gets a basic free $25 bil­lion investment.

And the dog-shit icing on the ele­phant turd cake is that we’re not even solv­ing the right prob­lem. It’s not a liq­uid­ity prob­lem that is caus­ing the eco­nomic mar­kets to tighten up their col­lec­tive lend­ing ass­holes, it’s a trust prob­lem. We’re basi­cally throw­ing a tril­lion dol­lars at the wrong prob­lem. Anna Schwartz talked about this in this weekend’s Wall Street Jour­nal. I strongly urge you to read that arti­cle to under­stand why we’re in so much trou­ble. We’re being led by peo­ple who don’t seem to be able to deter­mine what the prob­lem is, much less how to solve it. Either that or they are kow­tow­ing to pub­lic opin­ion and when the orig­i­nal plan, which did address the cor­rect prob­lem, didn’t serve to imme­di­ately relieve the finan­cial mar­kets, they folded like a house of cards and went look­ing for a way to get imme­di­ate gratification.

Back to the orig­i­nal theme of this post, in the orig­i­nal plan to buy toxic assets from banks, we would have been address­ing the cen­tral prob­lem of trust. Cur­rently, banks don’t know who to trust so they are refus­ing to loan to other banks. They have this sense of dis­trust because they have no way of know­ing how much worth­less shit is sit­ting on the other banks’ bal­ance sheets. Until that dis­trust is resolved, we’re likely to con­tinue to have a very cold credit mar­ket. If Paul­son and Bernake would have stuck to their guns to buy toxic assets, at least banks could start to feel com­fort­able lend­ing to other banks. Once that hap­pened, the credit mar­kets would start to loosen and money could start to flow again. It was a bailout that actu­ally had a chance of working.

As it is, we’re about to flood the sys­tem with an insane amount of money, prob­a­bly lead­ing to a sce­nario where hyper-inflation ter­ror­izes the dol­lar in a year or two and on top of that, we the tax­pay­ers are get­ting a deal that’s almost guar­an­teed to not make us money. Wel­come to your US gov­ern­ment. It’s gonna be a fun ride.